Monopolistic competition and monopoly are two distinct
market structures that differ in various aspects, including
the number of firms, product differentiation, pricing
power, and market entry barriers. Here’s a comparison of
the two:
1. Number of Firms


Monopoly:
A monopoly market consists of a single firm that
dominates the entire market. This firm is the sole provider
of a particular product or service, with no close
substitutes available.


Monopolistic Competition:
Monopolistic competition features many firms
competing in the market. Each firm offers a product that
is similar but not identical to others, leading to some
degree of differentiation.
2. Product Differentiation

Monopoly:


In a monopoly, the product offered by the
monopolist is unique, with no close substitutes available.
Consumers have no alternatives but to purchase from the
monopolist.

Monopolistic Competition:

Firms

in
monopolistic
competition
sell
differentiated products. Each firm tries to make its
product stand out through branding, quality, features, or
customer service, allowing consumers to make choices
based on personal preferences.
3. Pricing Power

Monopoly:

The monopolist has significant pricing power

and can set prices above marginal cost. The lack of
competition means that the monopolist can maximize
profits by adjusting prices without losing customers to
rivals.

Monopolistic Competition:


Firms in monopolistic competition have some
degree of pricing power due to product differentiation,
but it is limited. If a firm raises its prices too much,
consumers may switch to close substitutes offered by
competitors.
4. Market Entry and Exit Barriers

Monopoly:


Monopolies often have high barriers to entry,
which can include significant start-up costs, control of
essential resources, patents, or government regulations.
These barriers prevent new firms from entering the
market and competing with the monopolist.

Monopolistic Competition:


Barriers to entry in monopolistic competition are
relatively low. New firms can enter the market easily,
attracted by the potential for profit. This ease of entry
promotes competition and prevents any single firm from
dominating the market for an extended period.
5. Long-Run Equilibrium

Monopoly:


In the long run, a monopolist can sustain
economic profits due to the lack of competition. The
monopolist may invest in research and development to
maintain its market position.

Monopolistic Competition:


In
the
long
run,
firms
in
monopolistic
competition can only achieve normal profits (zero
economic profit) because the entry of new firms erodes
excess profits. As more firms enter, the demand for each
firm's product decreases, leading to a decrease in prices
until firms earn only normal profit.
6. Efficiency

Monopoly:


Monopolies
are
generally
considered
less
efficient because they produce less than the socially
optimal output level and charge higher prices, leading to
a deadweight loss in the market.

Monopolistic Competition:


While firms in monopolistic competition also do
not achieve full efficiency (due to excess capacity), they
may produce a greater variety of products, which can
provide consumer benefits. However, they still do not
reach the socially optimal output level.
Summary
In summary, the main differences between monopoly and
monopolistic competition lie in the number of firms in the
market, the degree of product differentiation, pricing
power, barriers to entry, and long-run profitability.
Monopolies are characterized by a single firm with unique
products and high barriers to entry, leading to significant
pricing power and potential long-run economic profits. In
contrast, monopolistic competition involves many firms
offering differentiated products with relatively low barriers
to entry, resulting in limited pricing power and normal
profits in the long run.